Monday, March 14, 2011
7:01:31 PM EDT

New Headline Risk

by
Todd Shriber

For weeks, the headline risk stocks have had to contend with has come courtesy of the Middle East, a corner of the globe where the U.S. can find few friends. Now, the issue du jour comes from Japan, one of America's strongest allies. The aftermath of Japan's largest-ever earthquake shook U.S. stocks today with a broad swath of sectors feeling some pain due to Asia exposure. While the losses were worse earlier in today's trading session, the S&P 500 couldn't muster enough upside to close the day positive and slipped for the third day in four. The Nasdaq lost half a percent and the Dow barely missed doing the same.

Stats Table

If you believe that markets have a tendency to overreact in both directions, this was certainly a day that would fortify that belief and the uranium sector would serve as one place as where overreaction was easy to find. That is understandable as Japan is the third-largest user of nuclear power in the world behind the U.S. and France and the earthquake and ensuing tsunami have put the country on the brink of nuclear disaster.

The suddenly fragile position of nuclear power in Japan had traders speculating that plans to expand nuclear power use here in the U.S. would be imperiled and that emerging economies such as China and India that have said they too would like to expand their use of nuclear power would reconsider.

The result was a very bloody Monday for the uranium sector. There may be more, but I counted nine uranium-related stocks that trade on U.S. exchanges and the best performer of the group today was USEC (USU), which was down 11%. Cameco (CCJ), the biggest of the group by market value, shed 13% and from there it gets significantly worse as the next best performance is Global X Uranium ETF (URA) which lost over 17%.

I think the feeling someone somewhere had a crystal ball because URA had been under what I would call unjust selling pressure before the earthquake in Japan and with a real excuse to sell, URA was taken to the woodshed. In the essence of disclosure, I started a small long position in the ETF today.

Uranium ETF

On the other hand, it can be said that the solar sector overreacted positively to the negative events in Japan. There was a host of analyst chatter out today on various solar stocks, hardly any of it positive, yet even the names that were the objects of less-than-favorable analyst comments moved higher as the market started treating the solar sector as if it was the only source of energy available to the entire world.

That is some hyperbole, but not much. First Solar (FSLR) gained over 5% despite Credit Suisse noting Japan uses a different variety of solar technology than what the company specializes in. JA Solar (JASO) was up 6% and Trina Solar (TSL) and Yingli Green Energy (YGE) were both up 7%, but all three were downgraded by Piper Jaffray today. MEMC Electronic Materials (WFR) jumped 11% on speculation the companies semi wafers would be a hot item following Japan's nuclear issues.

In mergers and acquisitions news, the deal of the day came by way of Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B). Buffett, who recently said in his letter to Berkshire shareholders that the company's ''elephant gun has been reloaded'' and that his ''trigger finger is itchy'' made good on those comments with the announcement that Berkshire will acquire Lubrizol (LZ), the world's largest maker of chemical additives for $9 billion in cash.

The deal values Ohio-based Lubrizol at $135 a share, a 28% premium to where the shares closed on Friday. Berkshire's acquisition of Lubrizol is its second-largest acquisition in the past five years behind last year's purchase of railroad operator Burlington Northern Santa Fe for which Berkshire paid almost $27 billion. Prior to acquiring BNSF, Berkshire's biggest buy was the $16 billion purchase of reinsurance firm General Re in 1999 for $16 billion.

Buffett already had some exposure to the specialty chemicals business through a $3 billion investment in Dow Chemical (DOW) preferred shares that was made in 2009 to help the company finance its controversial acquisition of rival Rohm & Haas. So it can be said that Lubrizol fits the mold of a business that Buffett would find attractive: A company operating in a prosaic industry that offers high margins and a business model that Buffett can easily wrap his head around.

''Lubrizol is exactly the sort of company with which we love to partner â€“ the global leader in several market applications run by a talented CEO, James Hambrick,'' Buffett said in a statement. Hambrick will stay on to run Lubrizol following the deal, which is expected to close in the third quarter.

I am not going to get on my soapbox about this, at least not too much, but some readers may remember that I highlighted some unusual options activity in AirTran last fall before Southwest (LUV) announced its takeover of the company. Well, the same thing can be said for Lubrizol. Call trading surged to 2,931 contracts on March 9, and open interest for the April $110 calls jumped to 2,654 from 41, Bloomberg News reported.

A block of almost 2,200 April $110 Lubrizol calls traded on March for $2.35 a piece, Bloomberg noted. Those calls are now worth almost $25. Adding to the intrigue here is the fact that four-week average for Lubrizol options is just over 400 contracts. Draw your own conclusions, but Bloomberg did quote one source that called the activity in Lubrizol options ''more than suspicious.''

Lubrizol Chart

There is more M&A drama on the horizon and this news broke while the market was open today. Nasdaq OMX (NDAQ) is reportedly close to securing $5 billion in financing to make a competing offer for NYSE Euronext (NYX), operator of the New York Stock Exchange. Germany's Deutsche Boerse and NYX announced $10 billion merger plans last month and exchange consolidation has been heating up in international markets as well, but Nasdaq has been left out in the cold.

Nasdaq is reportedly working with IntercontinentalExchange (ICE) on the deal. ICE would acquire Euronext's European businesses, according to the Financial Times, and probably the derivatives business, too, as has been previously speculated, while Nasdaq would control NYX's equities trading business here in the U.S. All of that assuming NYX even entertains the offer.

Bank of America Merrill Lynch is among a group of four banks that would supply Nasdaq with $5 billion in financing and the exchange operator would raise another $5 billion through asset sales to fund its offer for NYX, the FT reported. Obviously, it remains to be seen how successful Nasdaq's bid will be or even if it materializes, but I think it is reasonable to assume a Nasdaq/NYSE combination would face some heavy antitrust scrutiny.

NYSE Euronext Chart

Perhaps lost in all the Japan-related headlines was news about the debut of the iPad 2 over the weekend. Depending on what set of analyst estimates one chooses to believe, sales for the new tablet device were either ''really good'' or ''flat-out amazing.'' Deutsche Bank and Piper Jaffray said 500,000 iPads sold over the weekend, but a couple of other research firms put their estimates at close to 1 million.

Piper Jaffray analyst Gene Munster said in a note to investors on Sunday that channel checks are turning up no availability for the new generation of the wildly popular tablet device. Munster said Apple (AAPL) will probably surpass his early prediction that 5.5 million iPads would be sold this quarter, Bloomberg reported.

What is truly noteworthy is that most estimates say that the bulk of iPad 2 buyers this weekend were first-time buyers of the device, something in range of 65%-70%. That says word traveled fast about how cool the first generation was and buyers were either ditching tablets made by rival firms in favor of or making their first-ever tablet buy the iPad 2. Speaking of rivals, at this point it appears Apple really does not have a Pepsi to its Coke in the tablet wars. Not only is the iPad 2 viewed as the superior tablet device, it also costs less than comparable products such as the Xoom made by Motorola Mobility (MMI). No wonder the iPad is expected to account for higher percentages of Apple's revenue going forward.

Tablet Revenue Chart

Looking at the charts, the S&P 500 did violate support at 1295 today, but it was able to eke out a close above that level. A close above 1300 would have been nice, but that was not to be had and now the 1305 area is looking like resistance. Tuesday's big scheduled event is the release of the FOMC minutes. Good news on that front and any improvement in Japan would probably lead the market higher.

S&P 500 Chart

An after-lunch rally helped the Dow pare its losses for the day and get close to 12,000, but support at 11,950 was violated intraday. Only seven of the 30 stocks in the Dow closed higher today, negating a 2% Japan-related jump for Caterpillar (CAT). GE was hammered on nuclear power fears and every financial stock in the stock index closed lower.

Dow Chart

Despite the bullish iPad 2 sales news, Apple barely moved today and the Nasdaq lost almost 15 points to close at the psychologically important 2700 figure. Just as 1275 on the S&P 500 will test the buy the dips crowd, 2675 on the Nasdaq will do the same. It would be bearish to see a close under that level for the Nasdaq.

Nasdaq Chart

Obviously, the FOMC minutes tomorrow are a critical event and if I was a betting man, I would bet that there is simply no way Chairman Bernanke even hints at the withdrawal of monetary stimulus. Not with the specter of $100 oil still an issue the market's dour reaction to the events in Japan. I get the impression that the shorts are squandering opportunities here. What should be triple-digit losses on the Dow get cut in half before the end of the day despite plenty of ammunition from Libya, then Japan, etc.

The good news for the bulls is that these issues have shelf lives. While most of probably aren't fans of the current regime in Libya, odds are that it will stay in place and that would stabilize oil prices. I am just telling you what the odds at Intrade.com will confirm. As for Japan, this too will pass. This is one of the most technologically advanced countries in the world populated by a prideful, resilient people that will not want a nuclear disaster on their hands.